Competition is increasing within Sydney’s mid-range hotel industry as hotel operator Megaboom lodged plans for its second 3 to 3.5-star hotel in the Sydney CBD.

The low-profile operator has submitted a development application for a 17-level hotel with 104 rooms at 19-21 Hunter Street, across TFE Hotels’ new Adina Apartment Hotel Sydney and Wynyard station.

Megaboom opened its first hotel at 93 York Street in 2015 with little fanfare but drew success from a market with more demand than supply.

The City of Sydney’s 2015 Visitor Accommodation Action Plan says only 16 per cent of rooms in Sydney are rated 3.5 stars and below, with four and five-star rooms dominating the market.

The greatest demand for hotel accommodation is in the standard-grade three-star range best delivered through the conversion of older office buildings.

Megaboom’s new hotel venture follows this recommendation. The hotel will be built over older-style office buildings that have been owned by Megaboom’s Hong Kong-based private owners for many years.

The commercial building at 19-21 Hunter Street will be demolished while a portion of the airspace at 15-17 Hunter Street will also be used as a cantilever for the hotel.

The Megaboom no-frills style will be replicated in the new tower which will offer a ground floor lobby and a small 96sq m retail space. Its target market are tourists and business executives.

The new Megaboom hotel will also liven up Hunter Street and benefit from the new light rail on George Street metres away.

While 3-star hotel rooms are in demand, Megaboom says the number of new hotel proposals is rising, and may eventually push down returns further. Returns have slipped to about 3-plus per cent, given new competition and the high cost of land.

The proposed cost of the development of the new Megaboom hotel is $22 million.